3 ITEMS TO WATCH IN 2010 - EMERGING MARKETS AND REITS LEAD 2009 - COMMODITIES DEPENDENT ON THE DOLLAR AND EMERGING MARKETS - RATES SET TO RISE IN 2010 - SHANGHAI COMPOSITE COULD BE LEADING THE S&P 500 - HAPPY NEW YEAR

ITEMS TO WATCH IN 2010... Link for todays video. Todays commentary will feature a few items to watch in 2010. First, I am showing a PerfChart with seven different ETFs representing five different asset classes. This is a good way to watch the intermarket picture unfold as well as the relationship between commodities, emerging markets and the Dollar. Second, the 10-Year Treasury Yield broke channel resistance and it looks like interest rates will rise in 2010. Third, the Shanghai Composite peaked 4-5 months ago and is not keeping pace with the S&P 500. This could be significant because the Chinese index bottomed 4-5 months ahead of the US to start the 2009 bull run.

EMERGING MARKETS AND REITS LED IN 2009... PerfChart 1 shows seven different investment ETFs representing five different asset classes. The S&P 500 ETF (SPY), Russell 2000 ETF (IWM) and Emerging Markets iShares (EEM) represent stocks. Bonds, commodities, currencies and real estate are represented by the Aggregate Bond iShares (AGG), the DB Commodity Index Tracking ETF (DBC), the DB Dollar Bullish ETF (UUP) and the REIT iShares (IYR), respectively. There are other asset classes and benchmarks, but these seven ETFs cover the invest-able spectrum pretty well. Over the last 12 months, the Emerging Markets iShares and REIT iShares were the top performers. Not to be overshadowed, the S&P 500 ETF and Russell 2000 ETF performed admirably with gains in excess of 20%.

Chart 1

The Aggregate Bond iShares is barely in positive territory this year and the DB Commodity Index Tracking ETF (DBC) will finish the year with double-digit gains. Commodities benefited from strength in the stock markets and weakness in the Dollar. In particular, strength the Emerging Markets iShares points to growth in the emerging market economies and this would increase demand for commodities, especially energy and industrial metals. The DB Dollar Bullish ETF was the only ETF to finish the year with a loss.

DOLLAR REBOUNDS AS COMMODITIES SOFTEN... PerfChart 2 shows these same seven ETFs from December 2nd until December 29th. Even though the Dollar will be down for the year, there are signs of change in December. The DB Dollar Bullish ETF (UUP) is the third strongest with a 4.4% gain. The Russell 2000 ETF (small-caps) and the REIT iShares are up over 7% and leading the way. Perhaps the biggest surprise here is the Emerging Markets iShares (EEM), which is down so far this month. Commodities are also down. It seems that a strong Dollar and weakness in emerging markets weighed on commodities this month. This is something to watch as we head into 2010.

Chart 2

Bonds also came under pressure in December as the Aggregate Bond iShares declined over 1.5%. Treasuries were hit with a double whammy over the last five weeks. First, the November employment report was much better-than-expected. Improvements in the employment situation could prompt the Fed to tighten policy in 2010. Second, the Treasury continues to flood the bond market with new supply. Holiday trading is also thin in the bond market, but the treasury must still hold its auctions to sell bonds. This week alone the Treasury held three auctions totally $118 billion.

A BREAKOUT FOR THE 10-YEAR TREASURY YIELD... With a big surge over the last 5-6 weeks, the 10-Year Treasury Yield ($TNX) broke channel resistance to signal a continuation of the prior advance. Chart 3 shows $TNX surging to 4% and then correcting in the second half of 2009. The channel breakout is bullish for long-term yields, but bearish for long-term bonds. Remember, rates move opposite of bonds. The next resistance level for the 10-Year Treasury Yield is around 4.2-4.5% (42-45 on the chart). Chart 4 shows the 30-year Treasury Bond ($USB) over the last three years. Notice that this chart is basically the inverse of the 10-Year Treasury Yield. The 30-year Treasury Bond moved below channel support and broke its October-November low. This bearish development points to lower prices with the first support level around 112.5.

Chart 3

Chart 4

WATCHING CHINA FOR CLUES... Investors may also want to keep an eye on the Shanghai Composite ($SSEC) for clues on global stocks and the economy. China is poised to displace Japan as the second largest economy in the world and its influence is growing. The Shanghai Composite bottomed in late October 2008, but the S&P 500 did not bottom until early March 2009. By the time the S&P 500 put in its bottom, the Shanghai Composite was already up 20%. $SSEC went on to surpass 3400 in late July and almost double from its October low. Since late October 2008, the S&P 500 is up around 18% and the Shanghai Composite is up over 80% (PerfChart 5).

Chart 5

Even though Shanghai is outperforming on a percentage basis, it is starting to lag on the price chart. Chart 6 shows the Shanghai Composite bottoming 4-5 months ahead of the S&P 500. China was leading the US at this time. Looking at more recent price action, notice that the Shanghai Composite peaked in early August and has yet to exceed this high. In contrast, the S&P 500 broke above its early August high and moved consistently higher the last few months. The Shanghai Composite did recover with a rally into late November, but fell short of its August high and shows a little relative weakness on the price chart. Could the Shanghai Composite be foreshadowing the S&P 500 again?

Chart 6

Chart 7 shows $SSEC with a rising wedge over the last few months. The index broke the wedge trendline, but bounced back above 3200 the last few days. There is a support zone around 3100 and a break below the December low would be bearish. The bottom indicator shows MACD moving into negative territory as momentum deteriorated over the last few days.

Chart 7

STRONG EURO WEIGHS ON EUROPEAN STOCK ETF... ETFs that invest in foreign assets are vulnerable to currency fluctuations. Chart 8 shows the Dow Jones STOXX 50 ($STOX50), which is an index of 50 European blue-chips from 12 different countries. Think of it as the European version of the Dow. Stocks in this index are traded on various European exchanges with share prices denominated in Euros. On the price chart, notice that the $STOX50 broke above its November high and is keeping pace with the S&P 500.

Chart 8

Chart 9 shows the Dow Jones STOXX 50 ETF (FEZ) failing to keep pace with the underlying index. First, FEZ met resistance around 43 in October and did not exceed this high in November. Second, FEZ has yet to reach resistance in December. The ETF has been underperforming the underlying index for the last few weeks. There are many possible reasons for underperformance. While ETFs are designed to track particular indices or groups, they can sometimes lag because of structuring challenges and management fees. Most recently, the ETF appears to be weighed down by weakness in the Euro. The bottom indicator window shows the Euro Index ($XEU) declining sharply over the last five weeks. The ETF must exchange Dollars for Euros to invest in European shares. This is beneficial when the Euro rises against the Dollar, but detrimental when Euro falls against the Dollar. Keep the currency crosses in mind when investing in ETFs based on foreign stocks or securities. Chart 10 shows the FEZ:$STOX50 ratio in green and the Euro Index in red. There is a pretty strong correlation here. FEZ outperforms $STOX50 as the Euro rises and underperforms as the Euro falls.

Chart 9

Chart 10

HAPPY NEW YEAR FROM ALL OF US AT STOCKCHARTS.COM ...

Chart 11